Northern District of California Upholds Assignment of Antitrust Claims to Indirect Purchasers

Portions of a reverse payment suit against Endo Pharmaceuticals and others were recently dismissed by Judge William H. Orrick of the Northern District of California. The case [1] was brought by plaintiffs who allege that a settlement agreement resolving a patent dispute over the drug Lidoderm illegally delayed the release of a generic version. We have previously discussed reverse payments (or pay-for-delay) cases on this blog.

A notable aspect of the decision is the court’s treatment of the indirect purchaser plaintiffs’ standing. Under the U.S. Supreme Court’s Illinois Brick decision, generally only direct purchasers have standing to sue for damages under the federal antitrust laws. Although the Court later ruled in California v. ARC America Corp. that individual states are not preempted from providing statutory causes of action to indirect purchasers (as many states have done), plaintiffs here proceeded under the Clayton Act, claiming that they had been assigned the direct purchasers’ (i.e., wholesalers’) antitrust claims.

The general proposition that indirects may pursue antitrust claims assigned to them by directs was not disputed by the defendants or questioned by the court. (That proposition is supported by a number of decisions.) Rather, the defendants argued that the assignments here—from the wholesalers to the indirect purchasers—were invalid because they breached a non-assignment clause in the wholesalers’ agreements with Endo. That clause did not specifically bar assignment of antitrust claims; it merely required parties to obtain consent before assigning the “agreement” or any “duties or responsibilities” therein. But defendants asked the court to follow a previous decision from the same district [2] in which a general nonassignment clause was held to bar the transfer of antitrust claims.

The court “decline[d] that invitation,” instead looking to a more recent decision—also from the Northern District of California [3]—and a case from the District of D.C. [4] that the court found more persuasive. In doing so, the court suggested that for a contract to prevent wholesalers from assigning antitrust claims (as opposed to duties and obligations created by the contract itself), it would have to do so “clearly.” That did not happen here. The court therefore held that the indirect purchasers may proceed with their assigned “direct” claims.

Judge Orrick’s decision, along with those upon which it relied, may inspire manufacturers who seek to enjoy the full fruits of Illinois Brick to include in their wholesale agreements clauses that specifically prohibit assignment of antitrust claims. But even with such clauses, antitrust defendants will continue to confront a patchwork of state statutes creating liability to indirect purchasers.

In one respect, though, allowing the indirects to sue by assignment of the directs’ claims might provide a surprising benefit to defendants by minimizing the risk of double recovery. That risk is a byproduct of the ARC decision, which allows both direct and indirect purchasers to sue for the same antitrust overcharge. That is, directs can recover under federal law under the Hanover Shoe decision, the precursor to Illinois Brick, even if they passed on an illegal overcharge to their customers; while under state-law Illinois Brick repealer statutes the indirect customers can recover the same overcharge from the upstream antitrust violator by proving that the middleman passed it along to them. But if those customers are suing for the same damages both as assignees of the direct claim and as indirect purchasers under state law Illinois Brick repealer statutes, presumably the single-satisfaction rule would bar them from recovering the same damages twice.